Question

Consider a market for babysitting services. There are N adults, each of whom has 1 child and 1 bottle of whisky. Taking care of a child in this economy requires half of some adult’s time every day, but an adult can hire other adults to babysit their own child. Similarly, an adult can hire himself out as a babysitter for other adults’ children. When an adult is not taking care of a child, they are partying. Adults like both partying and drinking whisky, and they do not value taking care of children per se. (a) Define a competitive equilibrium for this economy. (b) Explain why partygoers are sober and babysitters are drunk in this economy

Answer 1

a) Competitive equillibrium for this economy is when the number of babysitters supplied are equal to the babysitters demanded in the market, so that an equillibrium price is reached where the number of babysitters supplied are equal to the number of babysitters demanded.

b) The role of babysitters and partying keep swapping. If the adult is not doing babysitting, he is partying. As a result, the adult goes to the party as sober man, comes back drunk and do the babysitting when he is drunk. Thus the partygoers are sober and babysitters are drunk in this economy. If there are defined roles of adult as babysitters or as partying people, such kind of confusion and problem would not arise. The partygoers would always be drinking and doing party whereas babysitters would always be babysitters taking care of the baby.